EconSouth (Third Quarter 2004)

Q & A


Trucking Rolls Along

An Interview with Beth Dortch Franklin of Star Transportation

BETH DORTCH FRANKLIN
   
Title Chief Executive Officer
Organization Star Transportation Inc.
Function Star, founded in 1980, is a family-owned, irregular route truckload carrier. The company has facilities in Nashville, Memphis, and Knoxville, Tenn.; Jackson, Miss.; and Atlanta.
Web Site www.startransportation.com
Other Franklin is serving her second term as a director of the Nashville Branch of the Federal Reserve Bank of Atlanta. She is also a member of the Tennessee Trucking Association, the American Trucking Associations, the Nashville Chamber of Commerce, and the Interstate Truckload Carriers Conference. She is involved in community activities including the Junior League of Nashville, the Cumberland Science Museum, and the Vanderbilt-Ingram Cancer Center.

The trucking industry is experiencing the classic good news/bad news scenario: The recent shakeout in the industry has resulted in healthy demand for trucking, and carriers have been able to raise rates accordingly. But diesel prices remain high, insurance rates have soared, and keeping quality drivers is a persistent problem. Like every other trucking line, Star Transportation Inc., based in Nashville, Tenn., juggles these concerns in its business decisions. Star is a privately owned carrier with a fleet of 600 tractors and operates in the continental United States although its primary lanes are east of Dallas. Beth Franklin, Star’s chief executive officer, spoke with EconSouth about the industry’s challenges and opportunities.

EconSouth: How would you characterize the current state of the trucking industry?

Beth Franklin: I’m cautiously positive. Carriers that have survived the last couple of years are good operators, or they wouldn’t still be in business. I do believe, however, that we’ll continue to see people exiting from the transportation business.

ES: How have insurance costs affected your business?

Franklin: The excess insurance markets [where trucking companies get their insurance] have had huge increases. A few years ago, you could buy $20 million in coverage for $50,000, and now that amount of coverage can cost over a million dollars. It’s hard to find quality insurance companies to even quote the excess market for truckers. Many small carriers have built their grassroots trucking companies from a single truck. They may have a company that has grown to have several million dollars in assets. All of that is at risk if they can’t afford adequate umbrella insurance policies. They could literally be one serious accident away from losing everything. These companies are exploring exit strategies. If exiting the industry is a goal, now is the time to consider your options. This creates acquisition opportunities for carriers like Star Transportation who want to increase their fleets.

ES: What factors do you see affecting the cost of doing business in the near term?

“Carriers that have survived the last couple of years are good operators, or they wouldn’t be in business. I do believe, however, that we’ll continue to see people exiting from the transportation business,” said Franklin.

Franklin: Our industry is on the brink of experiencing dramatic increases in costs. Most trucklines with buying power have pricing locked in for equipment for one and a half to three years. Increases in the price of steel, engines, and other components are driving equipment costs up by 10 to 15 percent. These increases are starting to become reality. At Star, for example, our current price for trailers is good through 2004, but heaven help us next year. The costs of tires, driver wages, and fuel continue to rise, and those costs will have to be passed on to our customers. The trucklines that don’t achieve the rate increases will eventually be out of the market.

We’ve lost several weak carriers during the past couple of years. Soaring insurance costs and an inability to secure adequate rates and fuel surcharges took a lot of owner-operators and marginally profitable trucking companies off the road. Losing these carriers is one reason we’ve seen capacity tighten.

ES: Can you describe the current pricing environment for the trucking industry?

Franklin: We’ve been successful in achieving rate increases—our rates went up 4 to 5 percent in the first six months of 2004, and we expect an additional 3 percent increase by the end of the year. That’s dramatic, but we predict we’ll have to duplicate these rate increases next year to maintain healthy profit margins. The fuel surcharge is extremely important. The successful carriers have added surcharges to their contracts. When the Department of Energy’s average reaches $1.30 per gallon, surcharges kick in. Most trucking companies base rates on $1.25–$1.35 per gallon and then add a surcharge scale. As contracts expire, base rates may use a higher DOE average because it’s unlikely we’ll see substantial reductions in the price of diesel in the near future. Auto companies are famous for covering only half of an increase in fuel. Because carriers can’t absorb this additional cost, many trucking lanes for hauling production parts for autos are going back on the market.

Carriers drastically affected by the rise in fuel prices are the ones with a larger percentage of empty miles, or miles driven without hauling anything. Empty mile percentages can vary from 5 or 6 percent to more than 20 percent for flatbed carriers. I am not aware of any customer who pays a trucking company for fuel on the miles you run empty unless it is a dedicated, round-trip move.

ES: How does a trucking company minimize its empty miles?

Franklin: There are optimization software programs to help minimize empty miles. Another strategy is to focus on a certain area; increase density of your fleet in specific lanes rather than spreading yourself too thin. If you can consistently offer power in a region, you will be much more likely to command a greater rate per mile and improve your empty-mile percentage. Several years ago, Star had a much smaller fleet and a much larger service area. It did not work out nearly as well as our current strategy does.

ES: A year ago, how would your view of the trucking industry have been different?

Franklin: I would have said things were very challenging. Trucking companies were being pulled in many different directions. There were so many areas that needed attention it was hard to prioritize—hours-of-service regulations, changes in engines, soft freight volumes. Twelve months ago price increases were much more difficult to secure. One positive factor during a slow economic environment for some companies in the trucking industry is lost capacity due to carriers exiting the industry. This opens the door for rate increases with customers when the economy starts to strengthen. Customers are more willing to work with you—they listen when you go to them with issues such as excessive loading or unloading times. When there are more shipments than trucks, customers protect their quality carriers.

ES: How accurate a gauge of overall economic activity is the trucking industry?

Franklin: That’s an excellent question. My family has been in the trucking business all my life—I’ve always been told it’s a leading indicator of the economy. But its role as a gauge has changed. Corporate America has changed its strategy in some ways. For example, companies now depend on a just-in-time inventory strategy. Orders placed on Dec. 19 can still get to a customer’s shelves before Christmas. Still, monitoring trucking volumes will continue to be a useful tool for helping the Fed gauge economic activity. In today’s world we may use our industry more effectively as a tool if we compare more recent volumes, such as 30 days or less rather than quarter to quarter. To account for seasonal trends, it may be helpful to compare to the same month of the previous year.

ES: How do trucking companies deal with downturns?

Franklin: Different companies have different strategies for dealing with periodic downturns. Ours is pretty simple: Don’t let any customer be more than 10 percent of your business, and don’t let any industry be more than 20 percent. The automobile industry is an addictive one, but plants can shut down for a month if a particular model’s sales slow down. For example, we just experienced a month-long shutdown with a large domestic manufacturer. On the flipside, a smaller manufacturer only shut down for a week. You want to align yourself with successful industries so you can grow with them.

ES: What effect, if any, have clean-air regulations had on your cost structure?

Franklin: They’ve had a huge impact. Because of the new engines, we’ve lost four-tenths of a mile per gallon, and that increases costs by 1 percent. It’s unbelievable. Engine manufacturers can promise up to eight miles to the gallon, but realistically you’re lucky to get six. The new engines cost between $3,500 and $5,000 more than those before these regulations. That’s a substantial increase in costs for our equipment.

ES: How do the hours-of-service rules affect the trucking industry?

Franklin: A great deal. One of the most costly differences in the rules is the off-duty hours. Prior to January 2004, a driver could log waiting time as off-duty. Currently those hours are being counted against his road time. This costs the driver and the company because it can affect our utilization. The crazy thing is, the Department of Transportation just announced that it is going to change these rules again. Our industry spent millions of dollars on detention monitoring systems [which track the amount of time spent at a client’s location] and retraining our drivers and operation folks. Customers and truckers are anxiously waiting for the new rules.

ES: Driver turnover is a persistent issue for trucking companies. How does Star strive to increase driver retention?

Franklin: Driver retention is our biggest challenge. Star has more employees in the recruiting department than we do in sales. For every 100 applicants, we average hiring one driver because our standards are so high. The good news is our insurance costs and our driver qualities go hand in hand. We find if we keep the qualifications for our drivers above industry standards we have greater control of our insurance costs.

The other thing Star focuses on is getting our drivers home every week. Lots of companies claim they offer weekly home time, but few live up to the commitment. Our sales team solicits truckloads in areas where the drivers live. I’ve had drivers say they have been offered more money but will not leave Star because of this perk. It’s not always about the total dollar. Expenses are higher on the road, and you can’t have a quality family life. We also have employees who are liaisons for the drivers. Their position is designed to help drivers or their wives with health insurance claims, etc., while they are out on the road. It’s kind of like having a personal assistant, and this program works well for us.

ES: What new technologies have changed the way you do business?

Franklin: Prepass technology, which allows drivers to bypass weigh stations, is in all of our trucks. It increased our production, and we decided to put that system in because of driver retention. Anything positive you can do for drivers is worth considering. Not having to downshift and stop for weigh stations saves drivers a lot of time, and they love that. We also use detention-monitoring software. Detention monitoring ties in with the Qualcomm communication software. This technology gives you the ability to automate a notice to your customer, allowing them to get the truck in and out in the most efficient manner. The faster you can get the truck unloaded and loaded, the better off you are. Even if the hours of service change back to the old rules, the detention monitoring system was not a waste of money. Now we can hold customers accountable for our time. We can monitor the crews in warehouses and report via fax, e-mail, and phone to the traffic department. These reports let them know the actual loading and unloading times. Since they now have to pay for that time, it’s important to be able to document it.

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